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Internet ProviderS Shift To Metered Usage Billing

April 16, 2009

Subscribers of high speed Internet services may soon be paying monthly bills based upon the amount of bandwidth they consume, rather than a traditional flat rate service fee for unlimited connection time.

Internet service providers (ISPs) are currently testing metered access billing schemes, which resemble many cell phone service plans in which customers sign up for a particular service tier.

At least for now, the trials are providing customers enough bandwidth that most are unaffected.  But as more people turn to the Internet to watch TV and movies, they may begin bumping up against limits on metered rates that would result in costly over-use fees.

Sites such as Netflix Watch Instantly, Hulu, YouTube, Amazon.com’s Video on Demand are constantly increasing the number of movies and television programming available to consumers, providing plenty of incentives to go online to view such content.  

“If you wanted to watch TV over the Internet in 2000, you had to be willing to take much less content than cable,” Forrester Research senior analyst Bobby Tulsiani told MSNBC.

“Now you get much, much more. Of course, you’re still watching on your PC, not your TV, so there are tradeoffs, but they are tradeoffs many people are willing to make,” he said.

Most consumers are unaware of how much bandwidth they consume each month because they have never had a reason to care.

Time Warner, the third-largest ISP in the United States, is now offering 5 gigabytes of downloaded Internet content for $29.95 per month in 5 experimental markets.  That roughly translates to 15 hours of viewing standard-definition video, or 170 hours of online gaming, or 350,000 e-mails or some combination of those, the company said.   By comparison, one high-definition movie consumes roughly 7 GB of bandwidth.

According to some experts, metering could also have a broad societal impact, such as disenfranchising the poor,  hindering network growth and stifling innovation.

“Our use of bandwidth is growing smoothly every year, with more people using more all the time,” independent telecom analyst David Isenberg told MSNBC news.

“One of the main nutrients on the Internet is low price. If you start stomping on that or putting in the wrong kind of price signals, my fear is you will inhibit all kinds of innovation.”

Time Warner Cable, which operates its Internet service under the Road Runner brand, has been offering tiered, capped service in Beaumont, Texas for some time.  In March, the company began testing the new pricing in Austin and San Antonio, Texas, Rochester, New York, and Greensboro, N.C.

It’s maximum offering, a 100 GB per month service, is not yet priced, according to spokesman Alex Dudley.  However, usage exceeding the caps is billed at an additional $1 per gigabyte.

Other large ISPs are also testing capped, tiered billing structures.

The largest, AT&T Inc., began similar trials last November in Beaumont, Texas, and in Reno, Nevada, offering services between 20 GB ($19.95) and 150 GB ($65) per month depending on connection speed.  Excess usage is billed at $1 per gigabyte.

Comcast Corp., the nation’s No. 2 ISP, allows up to 250 GB per month for a flat fee.  The company has asked the one percent of its users who exceed that limit to “moderate their usage,” but has not charged them more, said spokesman Charlie Douglas.

Verizon, the No. 4 ISP in the U.S., said it has no tiers or caps, while No. 5 ISP AOL does not offer broadband service and says it has not considered any consumption-based plans.

Both Comcast and AT&T say the reason they’re testing the caps is to maintain network quality.   In an statement, AT&T said 50 percent of  its bandwidth is used by 5 percent of its customers, something that “has an impact on all of our customers.”

However, that 5 percent could expand dramatically as an increasing number of subscribers consume TV, music, movies and news via the Internet rather than on traditional cable TV. 

The Internet is not yet classified as a utility, defined as a vital service or substance like water, electricity and heating gas or oil.

In a troubled economy, it can be abolished or reduced.  Nevertheless, many view Internet access as a necessary utility.

Cable companies worry that people are increasingly watching TV over the Internet.   Glenn Britt, CEO of Time Warner Cable, voiced his apprehension in February during a quarterly earnings call with analysts.

“We are starting to see the beginning of cord cutting,” he said.

“People will choose not to buy subscription video if they can get the same stuff for free.”

It’s tough to pin down how many people actually have given up cable “” most of the evidence remains anecdotal “” and which customers moved to a competitor. Still, Time Warner Cable lost 119,000 basic video customers in the fourth quarter, even after excluding subscribers it gave up from the sale of some cable systems.

Time Warner spokesman Dudley said the company is experimenting “to accommodate growth and anticipated growth, to better fund that growth.”

Consumption-based billing is more equitable, he said.

“Some of the population for whom the Internet buffet has been a very filling proposition are concerned.”

“We could charge everyone more, or create a plan that charges more to those who use more. The concept of paying for consumption is fair.”

However, Time Warner and AT&T emphasized that the trials may be changed, or even abandoned, if they meet with too much customer hostility, Dudley said.

“Overwhelmingly we’ve seen positive results, but we’ll see what happens. Presumably we’d retract it if there were enough outrage over it.”

Dudley rejected claims that the plan was intended to increase revenue, saying it was merely designed to grow the network and enhance its quality.

However, others question whether metering is designed to halt the expansion of TV and movies over the Internet by making it cost prohibitive, thus preserving cable’s bread and butter business.

Some question whether profits from metering will truly be invested back into network growth.

“The technology exists to never be bandwidth-limited again: it’s fiber optic cabling that’s virtually limitless in capacity,”  Isenberg said.

“But I think the money (from increased ISP fees) will go to executive bonuses and dividends, not to building a new network. They’d need to start new with that, not take incremental steps.”

ContentNext Media research director Lauren Rich Fine said consumption-based broadband billing was “a huge step backwards.”

“Inner-city youth’s ability to go online is the best way to give them broad access societally. Consumption-based models will end up being a bigger burden on less affluent people,” she told MSNBC news.

However, she doesn’t see such billing as inevitable, and said subscribers could continue receiving unlimited access unless they use video, for which a reasonable premium could be charged.

Isenberg wishes such billing could be avoided altogether

“We need new ways of thinking about bandwidth. We need to think of it like sewer services and roads rather than like food in a supermarket.”

However, former cable TV and ISP executive Alan Mutter called consumption-based billing both logical and necessary.

“In the early days of the Internet, especially abroad, uptake of online content was definitely slowed by metered access. There’s no question higher or metered fees retard consumption,” he told MSNBC news.

During the 1980s and 1990s, U.S.-based ISPs shifted to offering unlimited access as a way to achieve rapid growth.   Once customers were enlisted, they became reluctant to leave since it meant changing their email addresses.

Bu now that the market is more stable, ISPs are adjusting prices so their heaviest users pay more, Mutter said.

“I do see that as fair.”

However, the competitive environment must also be taken into consideration.  For instance, if one company initiates metered billing and others don’t, the metering plan could disintegrate, he said.

A more likely scenario is that other ISPs would adopt the metering approach, while making their offers seem like a better deal.

“In an environment where consumers are spending less at every turn, I think it’s inevitable businesses that have been offering an all-you-can-eat special for a decade will be considering ways to start charging by how much you use,” Mutter said.

“It’s just part of the economic times we live in.”

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